Site Navigation

Site Mobile Navigation

Why Aren’t Wages Rising Faster Now That Unemployment Is Lower?

When labor markets tighten, wages are expected to rise. Basic economics tells us that when workers are in higher demand, employers should have to pay more for their services. But in recent years, as unemployment has fallen below 5 percent in the United States, wages have not been increasing as fast as in the past. Economists debate the reasons; workers grapple with the consequences.

Going against convention

The unemployment rate has fallen to a comfortable level, but wage growth is sluggish.

U.S. unemployment rate

U.S. wage growth

10

%

+7

%

+1.9%

in 2016

+6

8

+5

+4

6

+3

+2

4

+1

4.9%

0

2

–1

Nominal (not

adjusted for inflation)

–2

0

–3

’93

’16

’93

’16

U.S. unemployment rate

U.S. wage growth

10

%

+7

%

+6

8

+5

+1.9%

in 2016

+4

6

+3

+2

4.9%

4

+1

0

2

–1

–2

Nominal (not adjusted for inflation)

0

–3

’93

’00

’10

’16

’93

’00

’10

’16

Source: Organization for Economic Cooperation and Development

When the two trends are superimposed, the historical pattern in which wages pick up when unemployment falls has not held this time around.

Wages grow faster as

unemployment falls.

Wages are not

growing as fast as

they were during

the last two

instances in which

unemployment

was relatively low.

Nor are they

growing any faster

than when

unemployment

was at its highest.

Wage growth slows down

as unemployment rises.

’93

’00

’10

’16

Wages grow faster as unemployment falls.

Wages are not growing as fast as they were during the last two instances in which unemployment was relatively low. Nor are they growing any faster than when unemployment was at its highest.

Wage growth slows down

as unemployment rises.

’93

’00

’10

’16

Source: Organization for Economic Cooperation and Development

What is happening in other larger economies?

This is a global problem. Wages are not rising as fast as expected in many countries, especially Britain, France, the Netherlands and Norway.

UNITED STATES

JAPAN

+1.9%

+0.8%

4.9%

3.1%

’93

’00

’10

’16

’93

’00

’10

’16

GERMANY

BRITAIN

+2.4%

+1.9%

4.8%

4.1%

’93

’00

’10

’16

’93

’00

’10

’16

FRANCE

ITALY

11.7%

10.1%

+1.4%

+0.8%

’93

’00

’10

’16

’93

’00

’10

’16

SPAIN

NETHERLANDS

19.7%

+1.1%

6.0%

NO

CHG.

’93

’00

’10

’16

’93

’00

’10

’16

NORWAY

PORTUGAL

11.2%

+1.4%

+0.8%

4.7%

’93

’00

’10

’16

’93

’00

’10

’16

UNITED STATES

JAPAN

GERMANY

BRITAIN

FRANCE

10.1%

+2.4%

+1.9%

+1.9%

+1.4%

+0.8%

4.9%

4.8%

4.1%

3.1%

’93

’16

’93

’16

’93

’16

’93

’16

’93

’16

ITALY

SPAIN

NETHERLANDS

NORWAY

PORTUGAL

11.7%

19.7%

11.2%

+1.4%

+1.1%

+0.8%

+0.8%

6.0%

NO

CHG.

4.7%

’93

’16

’93

’16

’93

’16

’93

’16

’93

’16

UNITED STATES

JAPAN

GERMANY

BRITAIN

FRANCE

10.1%

+2.4%

+1.9%

+1.9%

+1.4%

+0.8%

4.9%

4.8%

4.1%

3.1%

’93

’00

’10

’16

’93

’00

’10

’16

’93

’00

’10

’16

’93

’00

’10

’16

’93

’00

’10

’16

ITALY

SPAIN

NETHERLANDS

NORWAY

PORTUGAL

11.7%

19.7%

11.2%

+1.4 %

+1.1%

+0.8%

+0.8%

6.0%

NO

CHG.

4.7%

’93

’00

’10

’16

’93

’00

’10

’16

’93

’00

’10

’16

’93

’00

’10

’16

’93

’00

’10

’16

Source: Organization for Economic Cooperation and Development | Note: Data for each country are on comparable scales except for Spain and Portugal, which are on wider scales.

A hollowed-out labor market is partly to blame …

A fundamental refashioning of the labor market has been underway for two decades. Jobs that require middle-range skills have been declining, while those involving skills at both the lower and higher end of the spectrum have been growing. This effectively suppresses wages for many: People in lower-paid, lower-skill jobs — retail workers, janitors and home health aides — have little bargaining power to demand higher wages. Middle-skilled workers — including clerks, call center operators and factory workers — are being replaced by computers, robots and lesser-paid hands in low-wage countries. Higher-skilled workers are capturing an outsized share of pay.

Shift in occupations

Lower skills

Middle skills

Higher skills

Spain

France

Portugal

Britain

Norway

Netherlands

O.E.C.D. avg.

Italy

Germany

United States

Japan

–10

–6

–2

+2

+6

+10

–10

–6

–2

+2

+6

+10

–10

–6

–2

+2

+6

+10

Percentage point change in share of total employment, 1995 to 2015

Shift in occupations

Lower skills

Middle skills

Higher skills

Spain

France

Portugal

Britain

Norway

Netherlands

O.E.C.D. avg.

Italy

Germany

U.S.

Japan

–10

–6

–2

+2

+6

+10

–10

–6

–2

+2

+6

+10

–10

–6

–2

+2

+6

+10

Percentage point change in share of total employment, 1995 to 2015

Shift in occupations

Lower

skills

Middle

skills

Higher

skills

Spain

France

Portugal

Britain

Norway

Netherlands

O.E.C.D.

Italy

Germany

U.S.

Japan

+2

+6

+10

–10

–6

–2

+2

+6

+10

Percentage point change in share

of total employment, 1995 to 2015

Source: Organization for Economic Cooperation and Development

… as is the decline of collective bargaining.

Union membership has been declining in much of the developed world. But in the United States, where it’s lower than in most major economies, unions now represent less than 11 percent of the workforce. Economists see this as a critical factor in weak American wage growth, given that most workers do not bargain collectively.

60

%

Norway

50

Trade union memberships

Percentage of employees

40

Italy

30

Britain

Portugal

Germany

20

Netherlands

Japan

Spain

O.E.C.D. Total

United States

10

France

0

’94

’14

Source: Organization for Economic Cooperation and Development

Growing inequality is a result.

Focusing on the United States again, inequality is worse compared with many other major economies.